Sometimes, economic forces sneak upon us, involving things so familiar or that develop so gradually, we ignore them. We attribute change to symptoms rather than the underlying forces themselves.
This is occurring now, as “globalization” imposes difficult economic adjustments. People blame trade agreements and profit-thirsty managers. They don’t reflect on how the world’s population and stock of capital have diverged since World War II.
World population growth after World War II was the most important economic event of the 20th century. There were 2.5 billion people living on earth in 1950. By 1974, the world population was 4 billion, and it will hit 6.5 billion next year. Such growth, both in percentage rates and absolute numbers, was entirely unprecedented in world history.
Over the same span, the U.S. population doubled from about 150 million to nearly 300 million.
Measuring productive capital around the world is difficult, but clearly the global stock of capital did not grow in step with global population.
Introductory economics teaches us that the relative prices of factors used to produce goods and services — such as labor, capital or natural resources — depend on their relative abundance. If labor grows faster than capital, the share of total income made up of wages and salaries will fall. The proportion consisting of interest and dividends will rise. That is what is going on right now.
The opposite occurred in the 1300s. Severe famines followed by the Black Death in 1348 cut European populations by at least 30 percent. England’s population dropped from 3.7 million to 2.1 million in less than a century.
Labor became scarcer, especially relative to land. Wages and the prices charged by urban artisans rose. Fewer peasants meant land rents fell. The wealthy hated to pay more for goods and services while receiving less in rent. Laws were passed requiring workers to accept the old wage rates and for products to be sold at the old prices, but such anti-market regulations were largely futile. Some provoked popular uprisings.
We may not like the post-WWII global population explosion, but it happened. Moreover, improvements in transportation and communications have decreased the economic isolation of nations like China, India, Nigeria or Brazil.
Capital can flow to these countries if the return there is higher. And, either goods or people will flow from poorer countries to those where incomes and wages are higher.
Like 14th century nobles, we can see this as an unnatural injustice. We can erect legal barriers to the movement of goods, people and capital. But we are trying to stem a tide that is inexorable.
This too shall pass. The population of Europe grew again. Europe eventually became much wealthier than it had been in 1300. Similarly, the hard adjustments of the early 21st century will eventually be only a memory. But the world our grandchildren live in will be different from the one we know.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.